Clarity Is Missing Link in Supply Chain

In the Wall Street Journal today, Prhed Dvorak writes an interesting piece highlighting the importance of clarify -- or visibility -- in the supply chain. He illustrates how the sudden changes in the market last fall created huge disruptions and discrepancies throughout global global supply chains.

Due to the increasing complexity of supply chains, demand visibility for most participants is many steps removed from the final product. This has lead to a disconnect, or mising link, in the supply chain that exposes these participants in new ways. Particularly in times of turmoil, the just-in-time supply chains that span the globe must react very quickly, but without true visibility to demand variation. 

The following diagram from Dvorak's article helps one to visualize why it is so difficult for each participant in a supply chain to gain accurate demand visibility: 

Dvorak's article nicely illustrates this phenomon and the importance of connecting the supply chain data stream from end to end for better clarity.

Here is an excerpt of Dvorak's article:

"For a man who sells the chip "brains" that power millions of TVs, cameras and other gadgets, Levy Gerzberg found himself surprisingly unplugged last fall. In just a few short weeks, business virtually stopped.

He still marvels at the speed of the collapse. "I think about it today, and ask, 'Why did it happen so fast?' " says Mr. Gerzberg, CEO of chip designer Zoran Corp.

The reason is now starting to become clear. The world's complex "just in time" manufacturing supply chains are making it increasingly tough for Zoran, and any other single link in the chain, to know what's going on just a few links away. Sometimes, Zoran itself doesn't even know how its own chips are used: One batch it thought was destined for DVD players instead turned up in digital picture frames.

The recession has exposed a harsh side effect of the supply-chain system. Because modern industry rewards suppliers with the leanest inventories and fastest reaction times, when economic crisis struck, tech companies up and down the line contracted as sharply as possible in hopes of being the ones to survive....

Forced to guess at demand for their products in a plummeting market, everyone hit the brakes, hard. An examination of the electronics supply chain -- from retailers all the way back to makers of factory machinery -- shows that, at almost every stage, companies were flying blind as they cut...

The cumulative result: The tech pullback may have been overdone. In March, Best Buy Co. said it could have sold more electronics equipment in the three months ended Feb. 28, but its suppliers' deep cuts made it tough to keep shelves stocked. Suppliers "all decided to build a lot less," says Best Buy merchandizing chief Michael Vitelli.

As the contraction raced down the supply chain, its effects became amplified. Rick Tsai, CEO of chip manufacturer Taiwan Semiconductor Manufacturing Co., has said that, in last year's final quarter, consumer purchases of electronics gear in the U.S. fell 8% from the prior year. But product shipments fell 10%, and shipments of the chips that go into the gear dropped 20%.

The speed of the cuts are a big change from previous economic slumps. As recently as the early 2000s, companies compiled orders only monthly or quarterly; now they often do it every week. Their quicker reflexes this time kept their inventories from swelling dangerously, as happened last time, supply-chain experts say....

Complexities in the global supply chain make it tough to divine broad market trends, says Randy Bane, an economist for Applied Materials Inc., which makes factory equipment used to build chips like Zoran's....

Just a decade ago, the supply chain had far fewer links, Mr. Bane says. Chip sales were driven largely by personal computers, and just a handful of companies were bellwethers for the industry. Today, everything has a chip in it, dramatically multiplying the complexity. Behavior is "much more difficult to predict," he says.

At one end of the information flow are retailers such as Best Buy. For the U.S. market, it sends orders to its suppliers once a week, along with private forecasts for the coming 52 weeks, based on sales at its 1,000 U.S. stores and broader economic data. Manufacturers scrutinize reports like these to decide what parts they need to order.

The system is geared to respond quickly to changes in consumer behavior. But that puts risk on suppliers' shoulders....

"Usually the guy at the rearmost end suffers the most," says Morris Chang, TSMC's chairman....

The complete article can be read at the Wall Street Journal.